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Fiscal cliff negotiators face high hurdles

Monday 19 Nov 2012 11:51 a.m.

By Charles Babington

It's entirely possible that lawmakers and the White House will reach a deal that staves off an avalanche of tax increases and deep cuts in government programs before a January 1 deadline. To do so, however, they'll have to resolve deep political and fiscal disagreements that have stymied them time after time despite repeated promises to overcome them.

For many economists, corporate leaders and politicians, it's unconscionable to let the government veer over the "fiscal cliff", which could drain US$500 billion from the still-struggling economy next year. But even President Barack Obama says it could happen.

"Obviously we can all imagine a scenario where we go off the fiscal cliff," the president said last week. The likeliest cause, he suggested, would be "too much stubbornness in Congress", especially on the issue of taxes.

Many Republicans in Congress counter that it's Obama who is too unyielding.

The knottiest issues facing the White House and congressional negotiators include:

TAX RATES

Obama campaigned on a pledge to end the George W Bush-era tax cuts for households making more than $250,000 a year. Republican leaders say the lower rates from 2001 and 2003 should remain in place for everyone, including the rich.

Both sides have dug in so deeply that it will be politically painful to back down. Republicans say tax increases on the rich would inhibit job growth. Democrats dispute that, and say it's only fair for the wealthiest to provide more revenue in this era of historically low tax burdens and a growing income disparity between the rich and the poor.

Most Republican lawmakers have signed a pledge not to allow tax rates to rise, even if they are scheduled to do so by law, as are the Bush-era cuts. Some Democrats say it may be necessary to let the December 31 deadline expire and have everyone's tax rates revert to the higher, pre-Bush levels. Then, the argument goes, Republicans could vote to bring the rates back down for most Americans, but not the richest, without breaking their pledge.

The tax rate issue is especially thorny because it doesn't lend itself to Washington's favourite tactics for postponing hard decisions. Lawmakers routinely resort to "continuing resolutions" to end budget impasses by keeping spending levels unchanged for yet another year. Politically, no one wins or loses.

Obama's campaign promise to raise tax rates on the wealthy precludes that. Either rates on the rich will rise and Republicans will absorb defeat on a huge priority, or the rates will remain unchanged, a political defeat for Obama.

LOBBIES AND THE STATUS QUO

Both parties have talked, vaguely, of raising revenues by limiting the itemised tax deductions claimed by about one-third of the nation's taxpayers. Among the most popular deductions are those for charitable donations, health care costs and mortgage interest payments. Each is represented by muscular lobbying groups that will fight to protect the millions or billions of dollars these tax breaks steer their way.

An array of ideas has been floated. They include capping a taxpayer's total deductions at $35,000 or $50,000, and limiting the value of deductions to 28 percent, instead of the current 35 percent for high earners. The coalition of universities and other institutions that rely on tax-exempt donations is so influential that some strategists say charitable gifts should be left untouched. The housing industry says the same about home mortgage interest.

"Once you put something on the table, there is enormous pushback all around," said Rep Peter Welch, D-Vt. He says going over the fiscal cliff, at least temporarily, may be the only way to force Republicans to accept tax increases and to embolden lawmakers to make painful choices.

50-50 NATION, 90-10 DISTRICTS

The past few presidential elections prove the country is almost evenly split between Democratic and Republican sentiments. But thanks to legislative gerrymandering, Americans' migration patterns and other factors, many House members represent districts that are overwhelmingly conservative or liberal. These lawmakers may recognise that compromise is the only way to get a law enacted in Congress.

But compromise may be a ticket to defeat in their next primary election by an ideological purist from their party's fringe.

This is especially apparent among some House Republicans who say Obama's re-election victory means little to them and their constituents. GOP insiders say House Speaker John Boehner, R-Ohio, expects to lose as many as 70 of his 241 fellow Republicans on a career-defining vote on an eventual compromise package to resolve the fiscal cliff. If Republican defections go much higher, it may be impossible for Boehner to push on without risking his speakership.

Rep Raul Labrador, R-Idaho, is among the conservatives who seem unlikely to embrace a bipartisan compromise. "We will continue to fight any member of our conference that decides this is a good time to raise taxes," he said last week.

DEMANDING CONSTITUENTS

For years, Americans have enjoyed high levels of government service at low levels of taxation, historically speaking. So the government borrows about one-third of every dollar it spends, piling up debt for future generations. Both parties often talk about cutting spending. But not much happens because constituents demand services they consider important and every government program is important to someone.

Solving the fiscal cliff is daunting, not merely because politicians must make tough decisions to raise taxes and shrink programs; these are the kinds of decisions that can get a candidate defeated. There's also the magnitude of the unpleasantness needed to make a real dent in deficit-spending after so many years of a government free lunch.

Because he has to submit a budget to Congress every year, the president has proposed more specific ideas for raising revenue and reducing spending than have the Republicans. He would raise an assortment of taxes on the wealthy. Obama says he wants $1.6 trillion over 10 years in new revenues. That's double the amount Boehner has suggested. As for spending, Obama would seek cuts in health costs, farm subsidies, rent assistance, airport construction and other programs.

Republicans have offered fewer details for how to bridge the spending gap, saying the president is obligated to lead.

Republicans say lower tax rates would spur economic growth, and thereby increase overall tax revenues. Economists say this "dynamic scoring" concept, related to "supply side economics", has run out of gas at today's low tax levels. As a share of the economy, federal tax receipts over the past three years have hit their lowest levels since 1950.